Category: Chart of the Week

Plummeting Pound Rebounds as PM Johnson is Thwarted

There has been a flurry of updates on the Brexit saga over the last three weeks, starting with the leak of the Yellowhammer doomsday report on August 18th to Wednesday’s stunning news of British Members of Parliament (MPs) successfully pressing forward on a measure to foil a no-deal Brexit. Throughout that time ­— and since the Referendum — the pound sterling has taken varying degrees of “pounding” based on these Brexit updates, and this week was no different.

In today’s chart, we show the intraday moves of the USD/GBP spot rate over the last three days. On Tuesday, September 3rd, MPs exerted their legislative muscle and debated the merits of a bill designed to prevent a no-deal Brexit on October 31st. In a sharp early sell-off that morning, the pound nosedived below the October 2016 “Flash Crash” dip and hit a 34-year low. The slump came amid growing fears that Britain could crash out of the European Union sans divorce agreement and the possibility of a snap general election. By that evening, however, MPs had voted 328 to 301 to seize control and presented a formal debate on the proposed legislation, delivering Prime Minister Johnson’s first legislative defeat in the House of Commons and causing the pound to rebound from the intraday low. And we saw the pound continue to rise in conjunction with PM Johnson’s second loss on the following day — MPs voted 329 to 300 in favor of the proposed legislative block on a no-deal Brexit. While it is unknown whether the pound will continue to climb, the MPs’ steps towards ensuring that the worst-case Brexit scenario would be avoided appeared to placate currency traders and the market.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Low Volatility Takes a Bite out of FAANG

FAANG stocks have underperformed the broad market over the past year, a stark change from their previous multi-year run of outperformance. More recently, this high-flying group has been negatively affected by a slowing global economy, the U.S.-China trade war, and antitrust investigations. On the other hand, low volatility equity strategies — heavily allocated to defensive sectors of the market such as utilities, REITs, and consumer staples — are benefiting from concern that we are late cycle, slowing global economic conditions, and falling interest rates. As investors seek to mitigate downside risk within equities, low volatility investments have been the recent winner.

This week’s Chart of the Week shows the growth of $100 for the S&P 500 Low Volatility index, the S&P 500 index, and the NYSE FANG+ index over the past year. As of August 23rd, the S&P 500 Low Volatility index had a trailing one-year return of +15.3%. Over this same time frame, the S&P 500 index returned a meager +1.7% while the NYSE FANG+ index fell by -12.4%.

The basic premise of low volatility investing is winning by not losing. A focus on lower beta, lower volatility stocks provides downside protection and helps with the power of compounding over time. The low volatility trade isn’t entirely a free lunch since popularity in this investment style has driven up valuations. Across defensive sectors, valuations are well above their long-term historical averages and trade at a premium to the broad market. As of July month-end, the S&P 500 Low Volatility index had a trailing P/E ratio of 23x compared to 21x for the S&P 500 index. While valuation levels for low volatility indices are certainly elevated and may have an impact on future price appreciation, their lower beta nature should act to mitigate downside risk relative to the broad market.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Good Old Days

It may be tempting for some investors to “time” the market in order to enhance returns in times of market volatility or to avoid exposure on days of anticipated losses in the equity market. However, this strategy can prove detrimental to a portfolio that compounds over time.

This week’s Chart of the Week shows the cumulative effect of missing out on the 5 best days and 10 best days of return for the S&P 500. If $1 were invested in October of 1988 and simply left alone, the investor would have $20.88 as of August 22nd, 2019. However, if out of a sample of 7,771 days, solely the 5 and 10 best days of return were missed as a result of not being invested in the S&P 500, the investor would have $13.95 and $10.50, respectively. Investors may be tempted to time the market in the short-term but making a wrong timing decision can drastically impact returns as shown in the chart above. It is nearly impossible to predict how the market will react on any given day and attempting to move in and out of the market incurs trading costs as well as the risk of losing out on a few crucial days of return. Compounding returns also widen the gap between the lines over time and exponentially affects the dollar value of a portfolio. This illustrates the importance of staying invested, especially through periods of high volatility when large swings in returns are more common.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

All is Not Lost for 2019

Given this week’s volatility driven by (brief) yield curve inversion, the ongoing U.S.-China trade dispute, disappointing economic data from Germany, and overall growing pessimism about future growth, investors’ growing concerns about portfolio returns are entirely justified. However, despite this week’s volatility and mostly negative news, almost all asset classes have delivered positive returns for the year, with the great majority of U.S. equity strategies up double digits. Furthermore, most fixed income strategies have profited from falling interest rates, as shown by positive returns from investment grade as well as below investment grade sectors. And for all the negative news out of the Eurozone and China, international equities — as represented by the ACWI ex-US index — are still up more than 6% through August 15th. While the rest of the year is likely to feature elevated volatility and lower returns, barring a major market correction most portfolios should remain in positive territory, despite what has transpired the first half of August. If nothing else, we encourage investors to take a long-term view of the markets and not overreact in times of market stress, as stepping back and taking a longer-term view of the markets indicates that 2019 has been a profitable year to date.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

August Off to a Difficult Start

Since peaking late in the third quarter of 2018, U.S. equities have experienced large swings in performance. Following the worst December performance since 1931, the S&P 500 staged a dramatic rebound logging its best quarterly return since the first quarter of 1998. Equities continued their march higher culminating with the S&P 500 reaching an all-time closing high of 3,025.86 on Friday, July 26th. The year-to-date rally is attributable to a multitude of factors, however, a dovish pivot by the Fed and optimism around U.S.-China trade relations were key macro drivers facilitating the rebound.

However, fortunes quickly changed last week as the S&P 500 logged its worst weekly performance so far this year with a 3.1% drop and the sell-off continued into Monday with a steep one-day drop of 3%. Recent market volatility centers around changing expectations with respect to the economic outlook, market participants reconciling a smaller rate cut than was priced in, and an escalation in the trade war with China. U.S. officials had hinted throughout the year that a deal was close ­— and progress was being made — however that trade deal optimism is now in doubt. An additional 10% tariff on $300 billion worth of Chinese goods was announced last week and is set to take effect on September 1st. China retaliated by telling its state-owned companies to suspend U.S. agricultural imports and allowing its currency to fall to decade lows against the U.S. dollar.

Volatility is likely to stay elevated over the near-term as the economic and trade outlooks remain uncertain. Historically, August is a volatile month and on average the third quarter produces muted returns. It is worth noting that the S&P 500 still has a double-digit year-to-date return and is trading nearly 5% below all-time highs; whether or not the index remains in positive territory for the duration of 2019 will no doubt depend at least partly on how the U.S.-China trade issues play out over the next 5 months.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Fed’s First Post-Recession Economic Stimulus

The Federal Reserve’s two central aims are to keep unemployment below a 5% threshold and inflation near a 2% constant. This week’s chart looks at how the Federal Reserve addressed these aims as they cut interest rates on Wednesday, July 31st, 2019, for the first time since the 2008 Financial Crisis from a fed funds target rate of 2.25%–2.5% to 2.0%–2.25%. This well-telegraphed and long-expected 25 basis point cut signals a shift in the Fed’s monetary policy towards one of dovish1 stimulus after a period of hawkishness from 2015 to 2018 that saw the Fed raise the fed funds target rate nine times from 0–0.25% to 2.25%–2.5%. In conjunction with this rate cut, the Fed also halted the run-off of their balance sheet by restarting their reinvestment in government bonds, effectively infusing more cash into the economy to provide further support.

As shown in the chart, this latest interest rate cut occurs with unemployment well below their 5% threshold — which by itself shows that stimulus is not necessary, while inflation is lower than their 2% target — which by itself shows that some stimulus would not hurt. The reasons for the Fed’s cut include a persistently slow global economy, weak business earnings environment, high U.S. rates relative to low and negative rates2 set by other central banks, the fact that low unemployment has not been driving inflation higher, and potential threats to global growth including Brexit and the tariff escalation between the U.S. and several countries, such as China.

For more information, please reference our full newsletter on the topic.

Print > The Fed’s First Post-Recession Economic Stimulus

1 Dovishness is a term used to describe central banks and central bankers who want to provide economic stimulus to keep unemployment low by reducing interest rates, which makes it easier for businesses to borrow and therefore hire people because of greater economic activity. This is in contrast with hawkishness, which describes central banks and central bankers who want to slow the economy down in order to contain inflation by raising interest rates, which makes it tougher for businesses to borrow and therefore restrains prices because of less economic activity.
2 Negative interest rates have recently become more prevalent among German and Japanese short term bonds as those economies continue to languish and their governments continue to provide more stimulus.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Venture Capital Benefits from Mega IPOs

The first half of 2019 has produced a number of high profile IPOs including Uber, Slack, Pinterest, Zoom, Beyond Meat, and Lyft. These IPOs have made it a very successful year for U.S. venture capital exits. While the absolute number of exits has remained slightly below the pace of recent years, this year’s exits have been larger, generating nearly $190 billion through the first half of 2019. This year’s second-quarter exit value alone has exceeded the annual amounts for the venture industry going back to 2006. IPOs have accounted for nearly 83% of the cumulative exit value so far in 2019.

This strong exit environment is likely to allow U.S. venture capital to repeat 2018 as the strongest area of performance within the broadly defined private equity market. While we expect the first quarter to provide strong returns, the second quarter is where we will see a significant increase in performance as IPO offerings ramped up in the spring/early summer. With a robust remaining pipeline of potential IPOs scheduled for the second half of 2019 and 2020 including Airbnb, Palantir, Robinhood, Postmates, and WeWork, we do not see this market cooling off much in the near-term. Regardless of which of these remaining high profile IPOs materialize this year, 2019 is likely to be remembered by investors as the year of mega IPOs.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

What to Expect from Global Equities?

Through the first half of the year, most U.S. and non-U.S. equity indices have produced double-digit returns. For example, the S&P 500 and MSCI ACWI ex U.S. indices are up 18.5% and 13.6%, respectively. On the surface, these large returns appear to indicate a healthy equity market. However, when we dig deeper, we find that multiple expansion ­— rather than fundamentals — has been the key driver of year-to-date returns. In fact, earnings revisions have been negative across the globe as analysts have downgraded their 2019 EPS estimates.

Why have equity returns been so strong during a tepid earnings environment? First, we think markets were likely oversold in 2018, leading to a bounceback this year. Second, central banks throughout the world have become more accommodative, including possible rate cuts in the U.S. and tax cuts in China. This shift in monetary policy has boosted equity investor optimism. Looking to the rest of the year, we have a cautious view on equity returns given the poor earnings momentum. Additionally, macro events like the Brexit and U.S.-China trade relations serve as potential potholes in the second half. Collectively, these risks suggest more modest equity returns in the second half of 2019.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Evolution of Private Credit

With roughly $48B of U.S. private credit fundraising taking place in 2018 ­­— surpassing 2008 levels of $42B — private credit has established itself as an up-and-coming leader within the alternative space. By 2023, private credit is estimated to reach $1.4T in AUM, becoming the 3rd largest alternative asset class. This kind of success has brought with it increased competition, robust inflows, rising pools of dry powder and an inflow of managers within the space, up from 31 managers in 2010 to more than 130 in 2018.

The growth of available capital in the private credit market has been substantial, but the growing demand for debt has kept the opportunity largely intact. Direct lending, which is more prevalent in the middle-market, has rapidly developed into a meaningful source of debt capital within the private equity (“PE”) ecosystem.

Since the global financial crisis, the leveraged loan market has become less accessible to middle-market companies as banks have generally stopped lending in this part of the market. The volume of leveraged loans held by banks reached roughly 30% in 2008 and has since declined sharply to less than 10% today. Coupled with a 48% drop in the total number of U.S. banks from 1998 to 2018, demand for direct lending has increased as U.S. banks have substantially withdrawn from the market.

In their relentless search for yield, institutional investors stepped up in a meaningful way vis-à-vis direct lenders, and while highly competitive right now, direct lending brings PE-style returns with heightened levels of downside protection. Because private credit investments can be approached in a defensive, risk-controlled way, private credit is especially well suited for late-cycle conditions, and with its higher coupons, robust cash flows, and lower risk profile, we can expect private credit to continue to grow at an accelerated pace and become a consistent component of an increasing number of institutional investors’ portfolios.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Russell Indices Incorporate “Uber” Exciting IPOs

It’s that time of year again! The end of June brings longer summer days and the annual Russell index reconstitution. The Russell 1000’s constituent rebalancing this month also brings the inclusion of a few recent high-profile IPOs, most notably Uber, Lyft, Spotify, and Beyond Meat. This means all investors holding a passive allocation to the Russell 1000 will soon hold shares in these companies.

The Russell’s methodology weights constituent allocations based on the free-float market cap, which only includes shares readily available to trade. We show here estimated weightings of these newly IPO’d constituents alongside some well-known peers of similar weights. Notably, Microsoft has overtaken Apple as the largest index constituent. Uber, while likely the largest IPO of 2019, is still dwarfed by these two behemoths and will ultimately not become a massive component of the index’s roughly 1,000 constituents. Similarly, while the top few constituents seem to hold outsized portions of the index, the index’s performance is not dictated solely by them as they are significantly outnumbered by over 900 names which contribute to performance.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.